To assist Members of the Legislative Council in debating the above matter, the Consumer Council is pleased to provide the following submission.
The Council's 'Competition Policy Report'
In November 1996 the Consumer Council produced a report, entitled Competition Policy: the Key to Hong Kong's Future Success. In this Report, the Consumer Council argued for the case of establishing a legal framework for a comprehensive competition policy that is consistent across different sectors of the economy. This is better than the sector specific and piece meal approach that is now adopted by the government. The competition law would provide an overall, transparent, and non-arbitrary "rule of the game" promoting competition and guarding against various forms of restrictive behavior and the abuse of market power that artificially inflate prices. The law should be administered by a competition authority serving as an impartial referee, who could allow waivers in justifiable circumstances.
In the light of recent developments in the Hong Kong economy, the implementation of an effective competition policy is an essential step to help restore competitiveness, ensuring that no parties can gain abnormal profits through restrictive practices, rather than efficiency enhancing measures.
In its report the Council was not recommending that there be an intrusive form of government intervention into business conduct. Merely that for free markets to operate efficiently there was a need for government to intervene on those (hopefully rare) occasions when anti-competitive practices were taking place.
The Government responded to the Council's report in November 1997 with its own report –Competition Policy for Hong Kong and in May 1998 with its Statement on Competition Policy. In the latter document it listed a number of practices for illustrative purposes that it stated may warrant more thorough examination, for example, price-fixing, bid-rigging, market allocation, sales and production quotas, joint boycotts, unfair or discriminatory standards, predatory behavior, and setting retail price minimums.
It indicated that to maintain overall consistency in the application of its competition policy, it would provide a comprehensive, transparent and over-arching competition policy framework through its Competition Policy Statement and reinforce the statement with sector-specific measures not limited to laws.
This policy statement described the Government's role in playing a proactive role in promoting competition. The Government further promised to request Government entities to adhere to the Statement and submit new plans on how this would be achieved in their respective sectors. This was a positive step that also gave business an indication of the Government's competition concerns in terms of what conduct will restrict free market competition.
The Government's sector specific approach
There are a number of reasons why the Consumer Council thinks that a general competition law framework, enforced by a competition authority, is the better approach to competition policy.
The first is that an industry specific approach is 'piece meal' and cannot match the changes that are taking place in industry. There are various government agencies that have particular industries under their control. However, this approach takes a very static view of how markets develop and as a result, the agencies may be unable to respond quickly to convergence that takes place between different industries. In addition, due to the fact that some very large and powerful businesses have involvement across different sectors, it may be difficult for the various government agencies to monitor market conduct and obtain an overall view as to how those businesses influence competitive activity between different economic sectors.
The second is that sector specific regulation often translates into the issuing of sector specific licenses, thereby limiting regulatory action against licensees, and also limiting the scope of sanctions that can be imposed. The government's approach to the communications industry and the banking industry can be used as examples.
The communications industry must be considered in the context of what is happening and what is expected to happen in broadcasting, telecommunications, the Internet, and related content and advertising markets. New markets are emerging, such as web posting, web advertising and electronic commerce. It is interesting to note that the industry itself is not altogether clear where the Internet industry is heading, and what the extent of convergence will be. What is clear however, is that while some of the markets might bear a relationship to telecommunications goods and services, they might not necessarily be telecommunications markets per se. Therefore, the markets might not be under the jurisdiction of the Telecommunications Authority (TA).
A similar problem exists with attempting to use licenses as a means of addressing anti-competitive conduct. While the role of banks, for example, will increase in the development of electronic commerce, they are not licensees that come under the jurisdiction of the telecommunications regulator (the TA) that has a function of addressing anti-competitive conduct . The jurisdiction of the banks' regulator, the HKMA, is largely concerned with prudential supervision of the banking industry.
The clear inference from this is that anti-competitive conduct engaged in by a party that is not a telecommunications licensee, for example a content provider or software developer, will not be open to scrutiny from the TA. Moreover, it is also clear that there may be markets developing in the future that will not have an industry competition regulator such as the TA to take on responsibility for ensuring a competitive marketplace.
The Council's concern is that there is no regulatory safety net, such as general competition law, to catch anti-competitive conduct that could arise in markets to which the TA, or other industry specific regulator has no jurisdiction.
The inevitable consequence of the Government's approach is that it will be reacting to deficiencies in its sector specific regulatory stance as and when problems arise. As a result of the time lags inherent in this approach, there is the possibility that irreversible damage will occur in terms of economic efficiency, particularly in emerging markets where anti-competitive conduct of firms might not be caught by particular industry licensing schemes.
Competition Complaints received by the Council
In the course of discussions with trade bodies and businesses, particularly small and medium enterprises, the Council has been made aware of the lack of a level playing field and a vulnerability to monopoly practices, in some sectors of the economy, such as anti-competitive cross-subsidization, exclusive dealing, price discrimination, resale price maintenance and price-fixing.
While the Council does, from time to time, receive inquiries and complaints from the general public that could be characterized as complaints about anti-competitive conduct, these are not substantial. The Council believes that this is most likely due to the fact that:
- it is not in the interests of parties to anti-competitive agreements to make the agreements known (due to the benefits that accrue to them and related parties);
- businesses affected by what they believe to be anti-competitive conduct or agreements may be reluctant to make their concerns known due to the perceived threat of retaliatory action;
- in the absence of a law to the contrary, the conduct itself might be recognized as 'normal' market behavior; and
- the impact of the conduct, in terms of harm to economic efficiency may not be immediately apparent.
The last point recognizes (as the Government noted in its Statement on Competition Policy) that the determination of whether a practice is restrictive, detrimental to economic efficiency or free trade, and against the overall interest of Hong Kong must be made in the light of the actual situation. The Council believes it is imperative that assessment of the conduct is undertaken:
- by an agency that is capable of exercising independent economic analysis and is not susceptible to industry capture;
- in the light of general competition legislation that applies a common set of transparent rules across the economy within which businesses can freely compete; and that
- where there may be a case for exemptions from the competition law prohibitions, that result in public benefits outweighing the detriments to competition, the exemptions are granted after appropriate public assessment has taken place.
